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Oil and gold price dynamics in a multivariate cointegration framework

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Abstract

This study delivers further insights into oil and gold price dynamics and their relation to U.S. prices and the dollar exchange rate. Previous studies have frequently analyzed this issue regarding the price either of gold or of oil; however, the role of both quantities has not been analyzed simultaneously in a broader context. To tackle this caveat, we use monthly data for the nominal effective dollar exchange rate, oil, gold and U.S. prices from 1976:01 to 2011:11. We carefully analyze the long-run as well as the short-run dynamics and the long-run impact in terms of shocks, applying a cointegrated VAR model. The main conclusion we reach is that although gold and oil are both important commodities, their economic impact in terms of their shocks differs significantly. In the long-run, both quantities seem to be positively related and shocks to the gold price drive the system. In addition, the gold-oil spread is positively related to U.S. consumer prices, which implies a stronger relationship of consumer prices to the former.

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Notes

  1. Blanchard and Gali (2007) analyze the pre- and the post-1983 periods, while Herrera and Pesavento (2009) focus on the periods from 1959 to 1979 and from 1985 to 2006. In both studies, the link is weaker for the second period.

  2. With respect to the general link between exchange rates and commodity prices, Chen at al. (2008) find robust power of commodity currencies in predicting global commodity prices, while their results provide little evidence of exchange rate predictability based on commodity prices.

  3. Bialkowski et al. (2011) have recently analyzed the possibility of a speculative bubble in the gold price.

  4. The latter shows the same movements such as the Europe Brent and the Dubai crude oil price series, which are also frequently used; however, observations prior to 1986 are not available for both.

  5. Geometric rather than arithmetic averaging is applied owing to the fact that the latter may introduce an upward bias due to the measurement of changes in the dollar’s average exchange value (Loretan 2005).

  6. The broad index provided by the Federal Reserve constitutes twenty-six currencies. Seven of them - the euro, the Canadian dollar, the Japanese yen, the British pound, the Swiss franc, the Australian dollar and the Swedish krona - are summarized under the major index. The nominal broad index increased by nearly 40 per cent between 1980 and 2004 owing to the higher inflation rate of several economies obtained in the broad index (Loretan 2005).

  7. Since excess kurtosis does not introduce a significant bias to the estimated cointegration vectors, the findings are more sensitive to excess skewness (Juselius and MacDonald 2004; Juselius 2006).

  8. Previous research has illustrated that the relationship between consumer prices and the nominal exchange rate is nonlinear and mainly driven by nominal exchange rate adjustment. Since this pattern is not the main point of our study, we do not explain this finding in detail. A discussion is provided by Beckmann (2013).

  9. The linkages between effective dollar exchange rates and the oil price have been examined by Beckmann and Czudaj (2013b).

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Authors and Affiliations

  1. Department of Economics, University of Duisburg-Essen, 45117, Essen, Germany

    Joscha Beckmann & Robert Czudaj

  2. FOM Hochschule für Oekonomie & Management, University of Applied Sciences, Herkulesstr. 32, 45127, Essen, Germany

    Robert Czudaj

Authors
  1. Joscha Beckmann
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  2. Robert Czudaj
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Correspondence to Robert Czudaj.

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Thanks for valuable comments are due to the participants of the 14th INFER Annual Conference, University of Coimbra/Portugal.

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Beckmann, J., Czudaj, R. Oil and gold price dynamics in a multivariate cointegration framework. Int Econ Econ Policy 10, 453–468 (2013). https://doi.org/10.1007/s10368-013-0237-8

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